Government Is Missing in Job Creation

Posted on March 12, 2014 by Popular Economics Weekly

Popular Economics Weekly

We know now why job creation has been so weak in the recovery from the Great Recession, or Lesser Depression, as some have called it. Governments have lost too many jobs, and that mostly includes public safety and healthcare workers, as well as some 300,000 teaching jobs lost due to the Great Recession.

Those wanting smaller government sometimes forget that these jobs enhance present and future productivity—creating a safer and healthier work environment, as well as better educational opportunities. The 175,000 net nonfarm payroll jobs created in February included some of those workers, but only a net 13,000 public sector jobs were created, whereas 16,000 public sector jobs were lost in January.

payjobs

Graph: Calculated Risk

This shouldn’t be a partisan problem. In fact, public sector job creation has been apolitical until the Obama administration with Republican presidents adding as many or more public-sector jobs than the Democrats since 1980.

pubsector

Graph: Calculated Risk

This Calculated Risk graph shows public sector job creation since President Carter, with Carter and HGW Bush leading the way, and Presidents Clinton and GW Bush close behind.

But some 728,000 government jobs have been lost during President Obama’s administration to date. And this has had a very noticeable affect on the unemployment rate, needless to say, as state governments in particular are mandated to balance their budgets annually.

States are beginning to hire back those teachers and public safety workers (i.e., police, fire, health care workers). California, for example, has hired back 70 percent of the 1.3 million public sector employees lost during the Great Recession, though its unemployment rate of 8.5 percent is in 47th place among state unemployment rates.

We can hope that continued overall employment growth in the private sector will increase tax revenues to the states, and so enable them to rehire more of their laid off employees so necessary to protect their own citizens’ interests.

Harlan Green © 2014

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JOLTS and Decline of Household Debt

Posted on March 11, 2014 by Popular Economics Weekly

Financial FAQs

There is a direct correlation between the increase in job openings announced in the Labor Department’s JOLTS (Job Openings and Labor Turnover) report, and declining household debt. How so? The increase in job opportunities—the number of job openings (yellow in graph) is up 7.6 percent year-over-year compared to January 2013, and that is enabling more households to pay down their debts.

JOLTS

Graph: Calculated Risk

This is while the Quits number decreased in January but is up about 3 percent year-over-year. These are voluntary separations, and mean workers are seeing more job opportunities that make them willing to leave their current job. (Light blue columns at bottom of graph is trend for “quits”).

householddebt

Graph: Calculated Risk

And household debt, as measured by the Federal Reserve’s Household Debt Service Ratio of mortgage and consumer loans to Disposable Income, has been declining steadily, and is now below 1980 levels. This is freeing up consumers’ incomes to spend more, needless to say, and a sign of better economic growth for 2014.

Sure enough, employers added 175,000 jobs to their payrolls last month after creating 129,000 new positions in January, said the Labor Department last Friday. The unemployment rate, however, rose to 6.7 percent from a five-year low of 6.6 percent as Americans flooded into the labor market to search for work.

This is even though 601,000 people could not get to work because of the winter weather, the highest level for February since 2010. Some economists said job growth in February would have been as high as 200,000 if not for the weather.

And the smaller survey of households from which the unemployment rate is derived showed 6.9 million people with jobs reported they were working part-time because of the weather. That was the highest reading for February since the series started in 1978.

So even the winter weather isn’t slowing down appreciable growth. And consumers now have more money to spend. So watch out, trendsetters and economic forecasters, when the Spring thaw sets in!

Harlan Green © 2014

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Janet Yellen’s Nemesis—The Great Moderation

Posted on March 6, 2014 by Popular Economics Weekly

Popular Economics Weekly

New Fed Chairwoman Janet Yellen has a great task ahead of her. How to combat the results of the Great Moderation, as it was called, that period of low inflation with moderate economic growth that prevailed from 1985 to 2007, according to Paul Krugman. But why, when lots of jobs were created, particularly the 22 million jobs created during Clinton’s presidency?

It was a period, “…that worked in part because the political insulation of central banks also gave them more than a bit of intellectual insulation, too,” said Krugman in a recent column. “If we’re living in a Dark Age of macroeconomics, central banks have been its monasteries, hoarding and studying the ancient texts lost to the rest of the world. Even as the real business cycle people took over the professional journals, to the point where it became very hard to publish models in which monetary policy, let alone fiscal policy, matters, the research departments of the Fed system continued to study counter-cyclical policy in a relatively realistic way.”

Leaving the Federal Reserve to only worry about large cyclical swings, while allowing the markets to largely grow with little regulation or oversight worked too well, in other words. It lulled policy makers into allowing the massive deregulation of financial markets for one, which led to the Great Recession.

And much worse. The result was loss of so much wealth since the Great Recession for the 99 percent that didn’t profit from deregulation. The labor market in particular has suffered most from deregulation, with globalization and free trade agreements allowing even highly skilled jobs to flow overseas, while states restrict collective bargaining for government employees and unions.

ULC

Graph: Econoday

This graph of Productivity and Unit Labor Costs illustrates the damage done to household incomes. So-called unit labor costs (ULC), a measure of incomes and benefits, have not on average grown at all since 2009, the end of the Great Recession.

The result is that The Great Moderation has more than moderated household incomes, reducing income growth for most Americans to zero after inflation, resulting in reduced demand and so slower economic growth that may never return to the 3.2 percent average GDP growth that prevailed since the Great Depression.

As Professor Krugman put it, “…the very success of central-bank-led stabilization, combined with financial deregulation – itself a by-product of the revival of free-market fundamentalism – set the stage for a crisis too big for the central bankers to handle. This is Minskyism: the long period of relative stability led to greater risk-taking, greater leverage, and, finally, a huge deleveraging shock… Also, sooner or later the barbarians were going to go after the monasteries too; and as the current furor over quantitative easing shows, the invading hordes have arrived.”

So it is Chairwoman Yellen’s task to bring growth back to household incomes and the overall economy. She must ignore the maxims and experience of the Great Moderation to do it, however. She must push for more government stimulus programs—whether for infrastructure, education, or Research and Development—to accompany the Fed’s efforts to hold down interest rates as long as possible to encourage moderate inflation. And she must not allow those “barbarians” at the Fed’s gate to prevail that want to reduce its powers to moderate such Great Recessions.

Harlan Green © 2014

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2014 Mortgage Volumes (and Delinquencies) Lower

Posted on March 4, 2014 by Popular Economics Weekly

The Mortgage Corner

It looks like the housing market still has to play catch up in 2014. Both mortgage volume and existing-home sales have declined drastically. But new-home sales and housing construction have picked up, even with the Polar weather, which should add to depleted inventories bought up during the ultra-low interest rates in 2013.

But recent higher interest rates are having an effect, so we will have to wait for the spring thaw to know if consumers have the means to continue buying homes.

“In January, we saw origination volume continue to decline to its lowest point since 2008, with prepayment speeds pointing to further drops in refinance-related originations,” said Herb Blecher, senior vice president of Black Knight Financial Services’ Data & Analytics division, formerly LPS Data & Analytics.

LPSorigs

Graph: LPS/Calculated Risk

One can see from the graph that originations in Q4 2005 were equally divided between Fannie Mae/Freddie Mac conforming and private label mortgages, whereas today Fannie/Freddie originate almost all conventional mortgages. Banks have not begun to originate and sell their own products yet, in other words.

This is while mortgage delinquencies continue to fall. The January 2014 overall delinquency rate fell to 6.27 percent and foreclosure rate to 2.35 percent. This meant 4,315,000 million were still in trouble, down from 5,208,000 in January 2013. That’s still a lot of homes in trouble, folks, and is contributing to the lowered inventories, since these borrowers have a much harder time either refinancing or selling their homes.

“Overall originations were down almost 60 percent year-over-year, with HARP volumes (according to the most recent FHFA report) down 70 percent over the same period. (The HARP loan program allows home owners to refinance at today’s rates, even if their loans are underwater, i.e., have negative equity.) These declines are largely tied to the increased mortgage interest rate environment, which is having a significant impact on the number of borrowers with incentive to refinance. A high-level view of this refinancible population shows a decline of about 13 percent just over the last two months,” said Blecher.

LPS

Graph: Calculated Risk

“Of course, in addition to higher interest rates, a good deal of this decline can be attributed to the fact that a majority of those who could refinance at historically low rates in recent years already have, and we see a similar dynamic in terms of HARP-eligible loans,” continued Blecher.. “The volume of HARP refinances over the past year has driven this population down to about 700,000 loans in January 2014, as compared to over 2.3 million at the same time last year. From a geographic perspective, outside of Florida and Nevada, we see the Midwestern states of Illinois, Michigan, Missouri and Ohio have among the highest percentage of HARP eligibility.”

We see, therefore, the need for more new homes, but also housing’s continued price and value appreciation to bring more of those delinquent homes back on the market. And that depends on whether new Fed Chairwoman Janet Yellen will support lower interest rates.

But she continues to maintain QE3 purchases will be lower in months to come, and that is the reason for higher mortgage rates, which are tied to Treasury Bond yields. So she is walking a fine line between deficit hawks and those who believe the housing market is not yet fully recovered. Let us hope she realizes that the housing market still needs such low interest rates to fully recover.

Harlan Green © 2014

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Wisconsin’s Austerity Lesson

Posted on February 28, 2014 by Popular Economics Weekly

Popular Economics Weekly

Governor Scott Walker is having his own problems with the ongoing investigation into staffers using public funds for political campaigning as a County Manager, but it doesn’t seem to faze him as he touts the success of his austerity policies.

The only problem is that government austerity policies pushed through in 2010 when he was elected Wisconsin’s Governor (tax cuts plus lower government spending) don’t work. Especially during such difficult times as now when America still needs to recover from the Great Recession. It’s a lesson from the Great Depression that’s been forgotten, when President Roosevelt’s administration hired 8 million workers to build American public works projects from 1935-43 under the Workers Project Administration.

Almost every community in the United States had a new park, bridge or school constructed by WPA. The WPA’s initial appropriation in 1935 was for $4.9 billion (about 6.7 percent of the 1935 GDP), and in total it spent $13.4 billion. Can we imagine what several $trillion in government spending would do today to boost economic growth, instead of the $831billion spent under the 2009 American Recovery and Reinvestment Act?

Wisconsin has gone in the other direction, depriving union workers in particular of incomes and jobs at a time when job creation should be Governor Walker’s priority. That’s why Wisconsin has fallen to the bottom of states in job creation, according to the Bureau of Labor Statistics.

Wisconsinjobs

Graph: Capital Times

Its beaten down public unions in particular are the poster children for what happens when governments take away workers’ ability to collective bargain, one of the most fundamental rights in any democratic society. The EPI Capital Times graph compares US job creation with national and other Midwestern states.

There is no other power to counteract the monopoly power of governments and private. Under Wisconsin’s Act 10 enacted in 2010, which eliminated collective bargaining for most public workers, thousands of government workers have seen smaller paychecks as they are forced to pay more for health care and pensions.

And a new report from the Economic Policy Institute also blames the slow pace of the national recovery on cutbacks in the public sector. Unlike in previous recoveries, state and local government austerity has been a major drag on job growth and the broader economy. The number of public-sector jobs fell by almost 3 percent in the three years following the recession, while the number of private-sector jobs grew (albeit anemically). The fact that public-sector wages have lagged behind those in the private-sector exacerbates government’s drag on the economy, said the EPI report by Heidi Shierholz and Josh Bivens.

This is because austerity—cutting government workers’ wages and salaries in the name of reducing government spending—cuts the overall demand for goods and services. And since government doesn’t make things, decreasing their incomes decreases their ability to buy private sector goods and services, therefore cutting private sector jobs.

You would think small business people, as well as consumers, would understand this. It should be a no-brainer that even Henry Ford understood in 1914, when he upped his employees’ salaries to $5 per day so they could buy more of his Model Ts.

Ford-5

James Couzens, the Ford treasurer, said: “It is our belief that social justice begins at home. We want those who have helped us to produce this great institution and are helping to maintain it to share our prosperity. We want them to have present profits and future prospects. … Believing as we do, that a division of our earnings between capital and labor is unequal, we have sought a plan of relief suitable for our business.”

We are at a similar juncture in history today with record income inequality that has caused the middle class Henry Ford helped to create greatly lose its purchasing power. Who will help them to bring back a government and economy that works for all, which restores a more equal division of earnings and labor, one of our most fundamental rights?

Harlan Green © 2014

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January New-Home Sales Soar

Posted on February 26, 2014 by Popular Economics Weekly

Financial FAQs

The Polar Vortexes haven’t stopped everything.  It looks like new-home sales are picking up in midwinter, a sign that existing-home inventories are too low. Sales of new single-family houses in January 2014 were at a seasonally adjusted annual rate of 468,000, according to estimates released jointly today by the U.S. Census Bureau and HUD. This is 9.6 percent above the revised December rate of 427,000 and is 2.2 percent above the January 2013 estimate of 458,000.

newsales

Graph: Calculated Risk

It was the highest sales rate since 2008, the end of the housing bubble. But inventories are still too low, which means new-home sales will continue to increase as more housing construction comes on line, with close to 1 million units already in the construction pipeline. The months of supply decreased in January to 4.7 months from 5.2 months in December.

existsupply

Graph: Calculated Risk

The problem is obvious from this graph. Inventories have returned to levels that prevailed from 1997 to 2005, a prolonged period of pent up demand for housing that, along with prolonged easy credit conditions, caused the housing bubble.

January’s data show a big 10.4 percent gain in the South which is by far the largest region for new home sales. The West, which is a distant second behind the South, shows an 11.0 percent gain.

A plus for sales has been recent price concessions as the median price is down 2.2 percent to $260,100. The year-on-year sales gain, which spent most of last year in the double digits, is now modest, at 3.4 percent and in line with the 2.2 year-on-year gain for sales.

This is while total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, dropped 5.1 percent to a seasonally adjusted annual rate of 4.62 million in January from 4.87 million in December, and are 5.1 percent below the 4.87 million-unit pace in January 2013.

So new-home sales are surging, and will continue to surge, as long as existing inventories are so low. Last month’s existing-home activity was the slowest since July 2012, when it stood at 4.59 million, and signals the effect of low inventories and rising interest rates that have cut mortgage applications to their lowest level in a year.

Harlan Green © 2014

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Existing-Home Sales Slow in January

Posted on February 25, 2014 by Popular Economics Weekly

The Mortgage Corner

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, dropped 5.1 percent to a seasonally adjusted annual rate of 4.62 million in January from 4.87 million in December, and are 5.1 percent below the 4.87 million-unit pace in January 2013.

Last month’s level of activity was the slowest since July 2012, when it stood at 4.59 million, and signals the effect of low inventories and rising interest rates that have cut mortgage applications to their lowest level in a year.

Total housing inventory at the end of January rose 2.2 percent to 1.90 million existing homes available for sale, which represents a 4.9-month supply at the current sales pace, up from 4.6 months in December. Unsold inventory is 7.3 percent above a year ago, when there was a 4.4-month supply.  But both rates are far below the  6-month inventory level in more normal times.

existhome

Graph: Calculated Risk

Meanwhile, mortgage applications are down for the year.  The MBA’s weekly mortgage applications refinance survey is down 70 percent since May, and its purchase index is down 8 percent in a year.

MBAapplics

Graph: Calculated Risk

This is even though 30-year fixed conforming rates are down to 4.0 percent since the latest signs of slowing factory activity and job creation over the past 2 months.

But the slowdown may be temporary, as the NY Fed’s just released Q4 Household Debt and Credit Report said consumers are paying down their debts while spending more.  The report showed that total household debt is 9.1 percent below the Q3 2008 peak. Mortgage debt is down 13.4 percent from the peak, and Home Equity revolving debt is down 25.9 percent.

householddebt

Calculated Risk

Does this mean the household deleveraging of debt that has held down consumer spending since the Great Recession is over?  Are consumers opening up their wallets finally, and will this boost 2014 housing sales? 

We believe so, because of the tremendous pent up demand generated by 5 years of subpar housing construction that has reduced inventories, much lower delinquency rates, and a growing population that is boosting housing demand.

Harlan Green © 2014

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Consumer Debts Returning to ‘Normal’

Posted on February 21, 2014 by Popular Economics Weekly

Popular Economics Weekly

The NY Fed released their 2013 Q4 Household Debt and Credit Report. The report showed that total household debt is 9.1 percent below the Q3 2008 peak. Mortgage debt is down 13.4 percent from the peak, and Home Equity revolving debt is down 25.9 percent.

This is even though aggregate consumer debt increased by $241 billion in the fourth quarter, the largest quarter-to-quarter increase since 2007, said the NY Fed report. More importantly, between 2012:Q4 and 2013:Q4, total household debt rose $180 billion, marking the first four-quarter increase in outstanding debt since 2008.

condebt

Calculated Risk

Does this mean the household deleveraging of debt that has held down consumer spending since the Great Recession is over? Are consumers opening up their wallets finally, and will this drive increased consumer spending and so GDP growth this year?

Barron’s Gene Epstein and Applied Global Macro Research (AGMR) economists believe so. AGMR projects 4 percent in economic output this year and next, arguing that future demand for housing will also boost consumer spending by creating jobs in the many ancillary industries that service housing. This is far above the Fed’s FOMC prediction of 2.8 to 3.4 percent GDP growth through 2015. It also means unemployment has to fall below 6 percent, and the Fed will begin to raise their overnight rate to 0.25 percent from its current 0 percent.

But AGMR’s report doesn’t take into account the sharp decline in federal and local government spending, which has been a drag on growth since 2009. It would have to pick up as well, in my opinion. This is happening in states like California, whose budget is now in surplus, but not at the federal level, in spite of the $1.1 trillion budget agreement for the rest of this fiscal year.

As net household borrowing resumes, it is interesting to see who is driving these balance changes, and to compare some of today’s patterns with those of the boom period. This will help to determine how sustainable is such consumer spending, and so economic growth and job creation.

Auto and student loans have led the way and been growing for some time, while overall debt continued to fall. But in 2013, the increased credit card and mortgage debt among the young and the riskless has led to a turnaround in the trajectory of overall debt. This was the case in the comparison in debt with 2005, and is still the case today. It is the under 30-year olds that are borrowing and spending the most.

 

blog_charts_template

Graph: NY Federal Reserve

And we believe it is the below-30 cohort that will comprise most of the increased demand for housing, as household formation is predicted to pick up above 1 million per year for the rest of this decade, according to the 2013 Harvard Joint Center for Housing Studies’ State of the Nation’s Housing report.

“With rising home prices helping to revive household balance sheets and expanding residential construction adding to job growth, the housing sector is finally providing a much needed boost to the economy,” says Eric S. Belsky, Managing Director of the Joint Center for Housing Studies. “But long-term vacancies are at elevated levels in a number of places, millions of owners are still struggling to make their mortgage payments, and credit conditions for homebuyers remain extremely tight.”

So as always, the key will be pent-up demand for housing and consumer goods that has been constrained since 2009, due mainly to the mountain of debt that has now been reduced to more manageable levels. But government has to be included in any growth projections, and any boost in government spending is still in question.

Harlan Green © 2014

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Hoorays For New Fed Chair Janet Yellen

Posted on February 18, 2014 by Popular Economics Weekly

Financial FAQs

Fed Chairwoman Janet Yellen’s congressional testimony proved that she is more than qualified to steer the US economy back to health. She is the economists’ economist, in a word, willing to explain the most basic economic truths in her first marathon session (7 hours) in front of the House Committee on Financial Services.

For instance, when asked why did we need QE3 purchase of securities, she responded that the Fed had taken seriously Congress’s twin mandates of maximum employment with stable inflation. And since inflation was in fact still falling (far below what is normal for healthy growth) and employment weak, keeping interest rates as low as possible at this stage of the recovery was the best way to boost the continued growth of jobs.

She also said the Fed would continue to taper their monthly QE3 purchases. But stocks and bonds rallied this time, rather than fell as in the past on the fear that higher rates might stifle growth. The markets took her remarks instead as a sign that economic growth was strong enough to be able to accommodate higher interest rates.

But her testimony was most important, because she instilled confidence that she knew what she was talking about. She was the Vice-Chairman that had created the current Fed policies with former Chairman Bernanke, after all.

 JOLTS

Graph: Calculated Risk

The best indicator re job creation is the Labor Department’s JOLTS report that tracks the number of ‘quits’, those that voluntarily leave their jobs because of better prospects. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. The number of quits (not seasonally adjusted) increased over the 12 months ending in December for total nonfarm and total private and was little changed for government.

The above graph, compliments of Calculated Risk, shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Notice how the yellow line of job openings has been rising since 2009, the end of the Great Recession. Hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs – when it is below the columns, the economy is losing jobs.

Jobs openings decreased slightly in December to 3.990 million from 4.033 million in November. But the number of job openings (yellow) is up 10.5 per openings year-over-year compared to December 2012, and almost double 2009 2.2 million openings, while quits increased in December and are up about 12 percent year-over-year.

This is the employment picture Fed Governors are seeing, and the reason there is still a long way to go to achieve full employment. After all, there were more than 5 million job openings in 2000 alone, and 22 million jobs created from 1992 to 2000. That was a different era, but one that the Federal Reserve is mandated to recreate.

Harlan Green © 2014

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Housing Inventories Continue Increase

Posted on February 11, 2014 by Popular Economics Weekly

The Mortgage Corner

Calculated Risk and Housing Tracker report that existing-home for sale inventories have increased 4.7 percent in February. It is good news for those who worry that the lack of inventory will hold back existing-home sales this year.

inventories

Graph: Calculated Risk

The red line denotes 2014 inventory from Housing Tracker’s Department of Numbers. California cities led the increases, with San Francisco inventory up 7.1 percent, San Jose + 8.6 percent, and Sacramento + 8.8 percent. And as of February 10, San Francisco had the highest weekly price increase of 4.9 percent. Thank you, Silicon Valley, as such high-tech startups as Twitter are headquartered in San Francisco.

This should mean price increases will slow, however, as more supply comes on the market, and default ratios continue to decline. The median asking price for homes in the US peaked in June 2006 at $319,459 and is now 21.1 percent lower. From a low of $211,844 in January 2011, the median asking price in the US has increased by $40,327 (19.0 percent), says Housing Tracker.

Tracking total distressed sales is the best way to determine how quickly housing is recovering from the Great Recession. And California’s distressed sales have dropped sharply in a year, down to 22.2 percent of sales in December 2013, vs. 42.5 percent in December 2013, according to Calculated Risk. Sacramento, noted for overbuilding even in good years, had the sharpest drop with total distressed sales down to 22.2 percent of sales in Dec. 2013, vs. 51.5 percent in December 2012.

However, the NAR’s Pending Home Sales Index, a forward-looking indicator based on contract signings, fell 8.7 percent to 92.4 in December from a downwardly revised 101.2 in November, and is 8.8 percent below December 2012, as we said last week. The data reflect contracts but not closings, and are at the lowest level since October 2011, when the index was 92.2.

pendingsales

Graph: NAR

But we believe with the percentage of conventional (vs. distressed) sales’ inventories increasing, existing-home sales will pick up in 2014. And if not, then new-home sales will take up the supply slack, with new-home building permits issued increasing close to 1 million annually.

Sales of newly built, single-family homes fell 7 percent to a seasonally adjusted annual rate of 414,000 units in December, according to newly released figures from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Despite the monthly drop, home sales in 2013 were up 16.4 percent over the previous year. But several factors seem to be slowing down new-home sales.

Some of the slowdown is due to winter weather, but also household formation has to pick up from its current 600,000 per year to a more normal 1 to 1.2 million new households being formed. This will happen as employment picks up and more young adults are able to leave home and live on their own.

Harlan Green © 2014

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